Geoffrey Barker – The key issue remains how the government will finance the ambitious rearmament plan set out in the 2009 defence white paper given the severe budget cuts it is implementing to maintain a surplus and to pay for costly domestic programs designed to restore support for Labor before the next election.

Defence Department secretary ­Duncan Lewis is preparing to resign as soon as tomorrow with the department in mounting turmoil over ­current and planned funding cuts.

Mr Lewis, a retired army major- general, has been in the job for barely a year. His shock resignation seems linked to the reluctance of the Gillard government to explain how it will pay for major new weapons systems. It is also likely to trigger at least a minor reshuffle of departmental heads in the bureaucracy.

The dramatic development comes at a crucial turning point for the budget today with the expenditure review committee of cabinet to consider spending cut options lodged by departments, including Defence, last week for possible inclusion in the mid-year review of the budget.

Prime Minister Julia Gillard yesterday sought to draw a contrast between the approach to spending cuts of her government and that of conservative state governments.

“We make tough decisions to bring a budget to surplus and to keep it there – those decisions are being made in Canberra right now,” she told the ALP’s Queensland conference. “What we don’t ever do is conduct ourselves like the conservatives, who enjoy delivering the cuts.”

This year the government cut the Defence budget by 10. 5 per cent, the largest cut since the end of the Korean war in 1953. In all, $5.5 billion will be cut from the Defence budget over the next four years as the government attempts to push the federal budget into surplus. Further reductions have also been mooted.

Speech reveals Lewis’ concerns

It is not clear whether Mr Lewis is quitting because of his frustrations with the government’s approach to defence funding or whether he was pushed by the notoriously sensitive Defence Minister, Stephen Smith, ­following a recent speech in which Mr Lewis voiced his concerns.

At an Australian Strategic Policy Institute dinner last month, Mr Lewis spoke warmly of the late legendary Defence secretary Sir Arthur Tange (1970-79) and the famous 1973 “Tange Harangue” in which Sir Arthur criticised what he saw as a gap between strategic policy and the defence budget. Mr Lewis approvingly quoted Sir Arthur’s ­aphorism: “You are not talking strategy unless you are talking dollars.”

Mr Lewis’s remarks came after two speeches by Mr Smith in which, referring to the Defence rearmament program, he insisted that “core capabilities will continue to be delivered”. But with a new Defence white paper being prepared for release next year, Mr Smith has refused to say how the core capabilities will be delivered as Defence budgets decline.

He then added: “We have come a long way since Mr Tange harangued the services in 1973, but if we don’t go further – much further– we run the risk of becoming irrelevant.” They were not words that Mr Smith would have enjoyed reading.

His message, interpreted by the executive director of the ASPI, Peter Jennings, is that “we need a strategy that fits what government is prepared to spend”.

But what the government is prepared to spend has remained so uncertain that Mr Lewis may have decided that his job was impossible.

Ambassadorial posting expected

Mr Lewis is expected to be appointed Australian ambassador to Belgium, Luxembourg, the European Union and NATO. He will succeed former defence minister Brendan Nelson, who is returning to Australia to run the Australian War Memorial.

Mr Lewis’s replacement as Defence secretary is still uncertain, but there is speculation that the job might go the current secretary of the Department of Foreign Affairs and Trade, Dennis Richardson, a tough bureaucratic veteran who has served as Australian ambassador to the United States and director-general of the Australian Security Intelligence Organisation.

Mr Lewis, a former special forces commander and Australia’s first national security adviser after he quit the army, took over as Defence Department secretary in September last year.

He was the first former military officer to be appointed to the position and the sixth Defence Department secretary in 14 years. He replaced Ian Watt, who was put in charge of the Department of Prime Minister and Cabinet.

Mr Lewis’s appointment was controversial because it broke the convention of appointing civilian secretaries to the so-called diarchic defence leadership that comprises the Defence Force chief and the secretary.

Mr Lewis was a former Duntroon classmate of the Defence Force chief, General David Hurley.